What is a Macroeconomic Factor?
A macroeconomic factor is a financial characteristic, trend, or condition that applies to a broad aspect of an economy, such as inflation, rather than a certain population.
Instead of affecting individuals, macroeconomic factors usually impact large populations and therefore are monitored by consumers, businesses, and governments.
Positive Macroeconomic Factors
Positive macroeconomic factors include events that help a country (or group of countries) stimulate economic expansion and stability.
More specifically, any economic development that leads to increased demand in goods or services is positive. This can lead to increased revenue and potentially higher profits and increased incomes and consumer satisfaction.
A common example is when fuel prices go down, people have more discretionary money and also tend to drive more, which leads to more consumption. It's also less expensive to have items shipped, which means products can be less expensive, further increasing demand.
Neutral Macroeconomic Factors
Neutral macroeconomic factors are events that have a neutral effect, or ones that don't sway the economy positively or negatively. Instead, the consequences will be determined based on what the intentions and reactions are, like trade regulations between countries.
For instance, adding duties or tariffs, or other types of regulatory policies can have a variety of results, depending on how the countries involved respond.
Negative Macroeconomic Factors
Negative macroeconomic factors are events that can endanger domestic or global economies.
For instance, political instability may lead to economic unrest because of the need to reallocate resources, and potential damages to assets, livelihoods, and property.
As another example, a crash in one sector of the economy can widely affect the economy as a whole, such as the housing crash in 2008. Poor lending practices led to a rash of foreclosures which had a severe negative impact on the US economy as a whole.
Examples of Macroeconomic Factors
Common measures of macroeconomic factors include gross domestic product, the rate of employment, the phases of the business cycle, the rate of inflation, the money supply, the level of government debt, and the short-term and long-term effects of trends and changes in these measures.
Gross Domestic Product
The GDP, or gross domestic product, measures the market value of goods and services created over a predetermined time frame. Think of it as a view of the productivity of the economy (domestic or global) at a given point in time. Macroeconomists usually use real GDP -- this measurement reflects price changes and takes inflation into consideration.
The GDP isn't 100% accurate but offers estimates that economists and investors can use to analyze business cycles -- periods of time between economic expansions and recessions.
They can then look at the reasons these cycles took place, whether that's due to consumer behavior, global phenomena, or government policy. The GDP can also be used to compare it across different economies.
Unemployment Rate
The unemployment rate reveals the number of people in the labor force who can't find employment. When an economy sees growth the unemployment rates are generally low. With growing GDP levels, that is, increasing productivity, more workers are usually required to support the increased output.
These new employees now have more income, so they spend more. They might go on more vacations, buy new homes, upgrade their personal belongings, etc. This creates demand in other areas of the economy and those companies need to also hire more people which, in turn, also contributes to a lower unemployment rate.
If the economy produces less (GDP goes down), it usually indicates that fewer employees are needed. This affects incomes and eventually consumption.
Inflation
Inflation affects the entire economy because it indicates that the value of the currency is decreasing. This affects everyone's decisions about consumption and savings, as well as production planning.
The inflation rate is measured using the GDP deflator or the Consumer Price Index (CPI). The CPI offers a snapshot of current prices of certain goods and services, whereas the GDP deflator is the ratio between the nominal GDP (only looks at changes in price) to the real GDP (prices that factor in inflation). If the nominal GDP is higher than the real GDP, that shows that there has been inflation since the base year of real GDP.
Money Supply
The money supply is a measure of the amount of money in circulation. The more economic activity there is, the more money is required to support it. The money supply is measured as liquid instruments (including all cash and deposits) in a country's economy at a given point in time.
A central bank may increase the money supply to offset the growing demand for money and rising interest rates in a growing economy. It may also increase the money supply to stimulate economic growth. When the money supply increases, businesses tend to increase production because of increased consumer spending due to lower interest rates, driving up profits and demand for labor.
Government Debt Levels
If government debt levels are high, the chances of a nation's standard of living may decrease, as tax revenue goes towards debt payments rather than government services. Increased government borrowing can also push up interest rates in general, which makes consumption more expensive. In less stable countries, the increased debt can make it riskier and thus costlier to do business in the country.
